Determining land values | Prices should not be based on recent high profits
St. JEAN BAPTISTE, Man. — The difference between last year’s and this year’s crop prices reveals the danger of basing land prices on short-term returns, says a Manitoba Agriculture farm profitability expert.
As well, he said if farmers don’t adopt a longer-term view, they’ll be vulnerable to repeated errors in making farmland purchase decisions.
“Last year (at this time) I could justify $4,000 to $5,000 per acre based on (crop return prospects), absolutely,” said Dan Caron in a presentation at Farm Days in St. Jean Baptiste Jan. 8.
But with 2014 crop returns likely to be less than the cost of production including fixed costs, farmland values would seem to justify only about half that amount, he said.
“We have to start making decisions based on longer-term averages, not looking at the year before,” said Caron.
“What happens if we look to the year before? Well, we end up with $4,000 per acre land and $9 canola.”
Caron said farmers in the Red River Valley have recently had super profitable years based on high crop prices and high yields. Even now farmers are doing well with the 2013-14 crop, with average canola yields of 51 bushels per acre and prices of about $10.68 per bu. for elevator sales since harvest, and better for earlier priced crops. But producers shouldn’t assume those yields and prices for the long term.
Land debt and payments must be assessed for long-term sustainability because they are long-term liabilities.
Caron said a long-term average return on land over operating costs is a little less than $130 per acre. The recent five-year average is $170.
That means that land interest payments of $133 per acre, based on present interest rates, and a 10 percent down payment, will provide a marginal return on land bought at $3,000 per acre.
Recent land sale prices reflecting the stellar returns of the past few years could soon seem unsustain-able, Caron said.
“Not every year is going to be like last year. Things are starting to look pretty ugly on paper.”
Caron said the long-term, break-even price for land appears to be about $2,800 per acre in the central Red River Valley. Lingering low prices could drop that to $2,500.
Caron acknowledged that it is difficult to figure out an affordable price for land. Some farmers might regret not buying land a few years ago because they thought it was too expensive, but since then, returns have been exceptional and land values have soared.
As well, some farmers in Iowa have made massive profits in recent years even after paying $15,000 per acre for land.
Caron said farmers should look at long-term averages for yields, prices, returns and other measurements.
“I really want to get people using planning and evaluation tools to make planned decisions, not just paying what they think is fair market value,” said Caron.
“We call (the going market price) fair market value for land, but fair market value is basically whoever pays the most.”